Marcellus And Haynesville Should See Oil Production Fall This Year

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

As with many oil-producing regions, it seems as though both the Marcellus and Haynesville areas are seeing significant downward pressure.

As rig counts in these regions fall, oil rig productivity can only keep up so much and it seems as though investors should expect output to decline moving forward.

Collectively, this will prove beneficial at a time when other regions are also seeing oil production fall, which will be great for long-oriented oil investors.

In prior articles, I dug into production data associated with the Permian Basin, Eagle Ford, Bakken, Niobrara, and Utica. In general, I've concluded that investors should expect the Permian to see oil output rise a bit near-term and for the Utica to rise just about no matter what. However, the Eagle Ford, Bakken, and Niobrara should, if rig counts don't rise again, see a meaningful decrease in oil production over the next 12 months. In an attempt to provide a comprehensive analysis, I elected to write another piece covering oil production from Haynesville and Marcellus and I arrived at a similar conclusion that I did for the Eagle Ford, Bakken, and Niobrara.

A look at the Marcellus and Haynesville regions

The Marcellus and Haynesville regions are two of seven major regions that the EIA (Energy Information Administration) provides data for regarding the production of oil and natural gas. The Marcellus is spread largely across West Virginia, Pennsylvania, and New York and is, in terms of land area, one of the three largest covered by the EIA, while Haynesville is spread mostly between East Texas and Louisiana. In the map below, you can see the layout of the two regions.

Click to enlarge

*Image from the EIA's Drilling Productivity Report

According to the data provided by the EIA, the Marcellus will account for 47,837 barrels of crude per day in February of this year, approximately 1% of output from among the seven major regions. Meanwhile, Haynesville will account for a similar amount of production, at 51,304 barrels per day. Collectively, these regions make up 99,141 barrels per day of domestic oil output and they will likely see a sizable haircut (collectively) in output in the months to come as the number of rigs in operation in the region continue their descent.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

In my analysis, I had to make some assumptions regarding their rig counts over time. Over the past six months, the number of rigs in the Marcellus has fallen by about four units per month and, today, stands at 38 rigs. Given the massive drop in energy prices, I don't think it would be unreasonable to expect rig count in the region to continue that drop of four units every month moving forward. In Haynesville, however, rig count has been much more steady and, according to the EIA, stood at 33 units in December. For the sake of conservatism and because of a lack of a trend in rig declines, I've elected to keep the number of units in the region unchanged from that level in perpetuity.

On top of the overall rig count, I had to look at the productivity of rigs in each region. In the graph below, you can see the historical month-to-month change in productivity for the Marcellus between January of 2007 and what has been estimated for the month of February of this year. Based on the data provided, the month-to-month change has been declining (it is estimated to be just 1.59% in February, the lowest improvement since March of 2012) but has averaged 2.86% per month if you average the data out since December of 2013. In my analysis, I will assume a 3% improvement per month just to be on the safe side. Haynesville's data is much more volatile (which is why I did not provide a graph) but the historical average monthly improvement has been about 1.47% over the same timeframe so I will use an estimated efficiency improvement rate of 1.5% moving forward.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

The last major indicator I had to look at relates to the decline rates of each region. In the graphs below, you can see what the overall trend has been for both the Marcellus and Haynesville regions. According to my data set, both regions have seen decline rates spike in recent months, with Haynesville's hitting just under 3% while Marcellus' is approach 10% per month. To account for the uncertainty of the future, I looked at three potential scenarios for each region; a conservative approach whereby the decline rate for Haynesville is just 2% per month while Marcellus' is 5%, a moderate (and very likely) approach whereby the rates are 3% and 10%, respectively, and a liberal approach where the trend keeps worsening for these locations, which assumes decline rates of 4% and 15%, respectively.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Output looks set to fall

In the table below, you can see the result of my analysis regarding the Marcellus. If my assumptions regarding the region are correct, it looks like the region could be due for a nice cut in output. In the most conservative scenario, investors should expect oil production in the region to drop by 12,191 barrels per day by the end of this year, representing a falloff of 23.7%. Under the moderate scenario, production should drop by 26,901 barrels per day, a decline of 52.2%, while the liberal (though probably unlikely) scenario would push production down by 36,184 barrels per day to just 15,309, which implies an aggregate production decline of 70.3%.

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*Source: Created by author with data from the EIA's Drilling Productivity Report

At Haynesville, the outlook is much more timid. According to the data I looked at, the most conservative outcome would result in output falling by a modest 1,210 barrels per day by the end of this year, or just 2.3%. The moderate outcome would also see a small decline during this timeframe. Even in the event that Haynesville sees the more drastic 4% decline rate I provided, total production would fall just 9,772 barrels per day, a falloff of only 18.7%. If the region were known for producing a great deal of oil, I'd say this would be material in nature but this is simply not the case.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Takeaway

After looking at the data I discovered, I can conclude that, absent a nice increase in rig count, both Marcellus and Haynesville should see a decline in oil production in the months to come if oil prices don't come back soon. In aggregate, these declines could be fairly decent in nature, especially thanks to the falloff we can likely expect in the Marcellus region, but Haynesville isn't enough to make a dent in the market by itself. When you add to these projected declines the prospect of other regions reporting lower energy production, however, this is starting to paint a picture where investors should anticipate a sizable drop in oil output across the nation in the months to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.